Wayne R. Landsman

The Relevance of the Value Relevance Literature For Financial Accounting Standard Setting: Another View

Disclosed is a machinery operator protection system and method, which inhibits the use of machinery unless the operator of the machinery is properly secured with a lanyard and/or body harness to the machinery. The disclosed system includes a lanyard connection detector for detecting proper attachment of at least one lanyard to a machinery operator and a lanyard interlock control for controlling a switch to selectively enable activation of the machinery when the lanyard connection detector indicates that the operator is properly attached to the machinery with the lanyard. The disclosed method includes the steps of: detecting when at least one safety lanyard is properly attached to a between a machinery operator and a piece of machinery; and inhibiting operation of the machinery unless proper operator safety lanyard attachment is detected. Optionally, the method may also include providing an audible or visual warning alarm to advise the machinery operator if he or she attempts to use the machinery without proper safety lanyard attachment.

Relative valuation roles of equity book value and net income as a function of financial health

Abstract This study tests predictions that pricing multiples on and incremental explanatory power of equity book value (net income) increase (decrease) as financial health decreases. Tests using a sample of 396 bankrupt firms and tests using a larger, pooled sample both yield inferences consistent with predictions. Findings are robust to inclusion of controls for industry, size, return-on-equity, and volatility of equity returns. Equity book value and net income multiples and incremental explanatory power vary predictably across three illustrative industries, selected based on the likely extent of unrecognized intangible assets.

Has the Information Content of Quarterly Earnings Announcements Declined in the Past Three Decades

This paper examines changes in the information content of earnings over the past three decades using the two metrics from Beaver [1968]: abnormal trading volume and abnormal return volatility. We find no evidence of a decline in the information content of earnings announcements over the past three decades, as measured by both abnormal trading volume and return volatility around quarterly earnings announcements. If anything, our results suggest an increase over time in the informativeness of quarterly earnings announcements. Variables reflecting changes in firm‐specific factors account for a portion of the observed increase.

Is fair value accounting information relevant and reliable? Evidence from capital market research

Abstract In financial reporting, US and international accounting standard-setters have issued several disclosure and measurement and recognition standards for financial instruments. The purpose of this paper is to review the extant capital market literature that examines the usefulness of fair value accounting information to investors. In conducting my review, I highlight findings that are of interest not just to academic researchers, but also to practitioners and standard setters as they assess how current fair value standards require modification, and issues future standards need to address. Taken together, evidence from the research suggests that disclosed and recognised fair values are informative to investors, but that the level of informativeness is affected by the amount of measurement error and source of the estimates - management or external appraisers. I also provide a discussion of implementation issues of determining asset and liability fair values.

Are Asset Securitizations Sales or Loans

This study addresses whether asset securitizations are really asset sales or a form of secured borrowing, by estimating cross-sectional equity valuation regressions to assess whether the stock market treats securitized assets and liabilities held by a special purpose entity (SPE) as assets and liabilities of the sponsor-originator (S-O). Overall, we find that the market views the SPE assets and liabilities as belonging to the S-O, i.e., the risk and rewards of ownership of the transferred assets reside with the S-O and not the SPE. Results from a boot-strapping simulation that controls for scale by randomly assigning SPE assets and liabilities from one S-O to another provide evidence that scale bias is an unlikely explanation for finding the market views SPE assets and liabilities as belonging to the S-O. Findings from specifications in which we permit coefficients to differ for S-O firms with high and low relative levels of retained interest indicate that whereas the market views asset securitizations by low retained interest S-O firms as sales, i.e., risk transfer has taken place, it views asset securitizations by high retained interest S-O firms as secured borrowings, i.e., risk transfer is incomplete. We also show that although the market views securitizations by regulated and unregulated S-Os as secured borrowing, there is suggestive evidence that regulated firms have greater incentives to use securitizations to achieve off-balance sheet financing. .

Implications of Components of Income Excluded from Pro Forma Earnings for Future Profitability and Equity Valuation

This study addresses three research questions relating to total exclusions, special items, and other exclusions. Are each of these pro forma exclusion components forecasting irrelevant? Are each of the exclusion components value irrelevant? Are the valuation multiples on the exclusion components justified by their ability to forecast future profitability as predicted by the Ohlson (1999) model? Findings are generally consistent with the market-inefficiency results presented in Doyle et al. (2003). Total exclusions are valued negatively by the market despite the prediction that total exclusions will be valued positively. Valuation results also suggest that stocks with positive other exclusions are overpriced.

The Impact of Analysts' Forecast Errors and Forecast Revisions on Stock Prices

We present a comprehensive analysis of the association between stock returns, quarterly earnings forecast errors, and quarter-ahead and year-ahead earnings forecast revisions. We find that forecast errors and the two forecast revisions have significant effects on stock prices, indicating each conveys information content. Findings also show that the fourth quarter differs from other quarters-the relative importance of the forecast error (quarter-ahead forecast revision) is lower (higher). We also find a marked upward shift over time in the forecast error and forecast revision coefficients, consistent with the I/B/E/S database reflecting an improved quality of both earnings forecasts and actual earnings. Copyright (c) 2008 The Authors Journal compilation (c) 2008 Blackwell Publishing Ltd.

The Valuation Differences between Stock Option and Restricted Stock Grants for US Firms

In this study, we document a significant shift over the past several years from stock option-based compensation to restricted stock-based compensation. Additionally, we evaluate whether stock option grants and restricted stock grants result in similar valuation consequences for firms. We estimate cross-sectional valuation equations that include the value of stock option and restricted stock grants summed over the current and past two years, residual income, and book value of equity, after controlling for endogeneity. Consistent with prior research, our findings indicate that the market on average values stock option grants positively. However, in contrast to stock option grants, restricted stock grants are valued negatively. This result is consistent with restricted stock grants lacking the positive incentive effects of stock options and being viewed as a liability or expense to the firm.

Do Investors Understand Really Dirty Surplus

This study addresses whether firms’ share prices correctly reflect two accounting measures, dirty surplus and really dirty surplus. Dirty surplus is readily observable from the financial statements, but really dirty surplus, which arises from recognizing equity transactions such as employee stock option exercises at other than fair market value, is not. Findings show that dirty surplus and really dirty surplus are irrelevant for forecasting abnormal comprehensive income. However, findings also indicate that investors appear to undervalue really dirty surplus. Hedge returns are insignificant when portfolios are formed based on dirty surplus, but are significantly positive based on really dirty surplus. Really dirty surplus positive hedge returns are robust to a variety of sensitivity tests. Taken together, the findings are consistent with either investors overvaluing firms that have large negative really dirty surplus or really dirty surplus being correlated with an unmodeled risk factor.

The determinants of capital gains tax compliance: evidence from the RJR Nabisco leveraged buyout

Abstract Inability to observe both actual and reported capital gains has impeded studies of capital gains tax compliance. This study overcomes such limitations through access to both confidential tax returns and internal shareholder records. Tests are conducted at the individual taxpayer level for associations between compliance rates for capital gains taxes generated by RJR Nabisco shareholders during its leveraged buyout and income, marginal tax rates, socioeconomic characteristics, and measures of the taxpayer’s perception of the noncompliance penalty. We find noncompliance decreasing in taxable income, including RJR Nabisco capital gains, first-dollar marginal tax rates, self-employment income, rental income, and other interest paid.